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It’s not just the Beer Store. The Wine Shop and the Wine Rack are also pillars of Ontario’s stagnant alcohol retailing landscape — and now face a possible shakeup.

Thanks to years of industry consolidation, these now-dominant wine chains continue to disadvantage smaller local competitors. And diminish LCBO profits that would otherwise flow to the provincial treasury.

Unlike the Beer Store, however, these two private wine chains have largely escaped public scrutiny over the years. Their stand-alone stores blend into the background, their shelves dominated by blended wines made up mostly of foreign bulk imports.

Operating apart from the province’s established alcohol monopoly, often located inside large supermarkets, the private wine stores are spared the LCBO’s high markups applied to competitors’ products. And unlike the Beer Store, which accepts rival brands, the two private wine chains exclude smaller, local competitors from their stores.

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That may soon change.

Sources say Queen’s Park is looking at a major reorganization of how the Wine Shop and the Wine Rack operate in their own highly profitable, private sphere. (Andrew Francis Wallace / Toronto Star) | Order this photo

Sources say Queen’s Park is looking at a major reorganization of how the Wine Shop and the Wine Rack operate in their own highly profitable, private sphere. An influential government-appointed panel, headed by former TD Bank CEO Ed Clark, has targeted them for reform.

Whether you are a wine connoisseur or craft beer aficionado (or none of the above, which describes me), this is a story about big money in a province with $2 billion in annual wine sales and a $3 billion beer market. Apart from personal tastes or retail preferences, there are major economic opportunities that Ontario could be exploiting to benefit growers, drinkers and taxpayers.

Ahead of the spring budget, the panel has looked at reclaiming or rewriting a large portion of those wine licences, which could then be reissued or repurposed for new alcohol outlets. The goal would be to create a more level playing field for smaller local wineries that feel short-changed, while increasing sales for Ontario-made products — and capturing greater income from private retail profits that now flow mostly abroad.

That includes reassessing these longstanding retail licences, which the owners have treated as a gratuity in perpetuity. In fact, those wine licences were once issued free — but never forever. Unlike wireless spectrum licences that are auctioned off for big money to mobile phone companies, the province has never received a penny for these highly sought, off-site winery licences that remain public property.

What do you think?

Few people are aware of how the two private wine retailers have expanded massively over the years, under the nose of a government-run monopoly. Now a battle is brewing behind the scenes as Clark’s panel re-examines the 268 retail licences enjoyed by the two big wine chains:

The foreign-owned Wine Rack is by far the biggest, with 164 stores selling a cross-section of lower-priced wines — many of which are blended with as little as 25 per cent Ontario grape content (combined with bulk wine imported from abroad). Its U.S.-based parent company, Constellation, is the world’s biggest producer of premium wine with sales of $5 billion a year from its global operations.

The Wine Shop, with 104 outlets across the province, is owned by Andrew Peller Ltd., Canada’s second-biggest wine producer with annual revenues of nearly $300 million. Opened in Ontario almost a half century ago, it also sells foreign-blend wines and gradually acquired more licences by buying out other local wineries.

Another 24 off-site stores are owned by several smaller local wineries, for a total of 292. That leaves the Wine Rack and Wine Shop controlling 92 per cent of the private wine outlets.

Significantly, all of these licences are protected (that is, “grandfathered”) under Canada-U.S. free trade deals, including NAFTA, which explicitly prevent any other wineries from opening any new off-site stores anymore.

The playing field has been frozen in place for decades, except when one company buys out a competitor, which is how the two dominant players were able to acquire more licences and consolidate their networks. Nor can smaller competitors sell their products in either of the two big wine chains.

Until now, the assumption was that Ontario’s hands were tied. But sources say Clark has been looking at reorganizing the playing field in another way — not by issuing new licences, but by reclaiming or repurposing those existing licences.

Sources say the objective is to free up or take back a sizeable chunk of those 268 licences, possibly auctioning them off to the highest bidder. The government could reallocate or repurpose those licences to new retailers, for example groups of VQA producers selling 100 per cent Ontario grapes.

Any new retail channel comes with risks. Despite the bold ambitions of VQA wineries, their more expensive product commands a relatively small share of the province’s wine market — only about 6 per cent — suggesting that new stores marketing Ontario-only wine could be a hard sell.

The two private wine giants rely heavily on so-called “International Canadian Blends” which typically feature 75 per cent foreign content, unlike the 100 per cent Ontario-grown products made by wineries from Ontario’s Vintners Quality Alliance, known as VQA. (Constellation and Peller also stock many of their own VQA labels in their stores, alongside blended bottles.)

The generous rules for foreign blending were drafted decades ago, when Ontario’s struggling wine industry needed protection to transition from low-end Concord grapes to higher quality vines. Those blending rules were set to expire in 2000, but remained in effect when the sunset provisions were ignored by government.

Originally conceived to benefit struggling local grape growers, the blending rules and store networks are now, paradoxically, protected conduits for cheaper bulk foreign wine that the Wine Rack and Wine Shop stock in their chains — without having to pay the LCBO’s higher markups. That results in enhanced profits for these two wine chains, but a missed opportunity for the government. Bottles blended with foreign content dominate the market, accounting for 75 per cent of all Ontario wine sales.

The problem, as Clark’s council argued in a preliminary report last November, is that the “benefits . . . accrue to select few owners. The concentration of ownership of off-site . . . stores leaves most Ontario wineries at a significant sales, marketing and retail distribution disadvantage.”

Licences have been transferred from one company to another as the industry consolidated, and “this value has accrued entirely to their private owners.” Not the province.

More to the point, given that Clark’s mandate is to maximize the value of provincial assets, is the glaring discrepancy in revenues collected by the treasury: The Wine Shop and the Wine Rack are exempted from the LCBO’s hefty markup of 66.5 per cent, instead paying a much lower tax rate of 16.1 per cent for blended wines sold on their own shelves.

The two private chains always charge the same retail price as the LCBO for the same product (as required by law). Consequently, they earn dramatically higher profits when that same wine is sold in their own networks, leaving less money for the provincial treasury. (VQA wines with 100 per cent grapes are charged a 6.1 per cent tax).

“As a result, owners of off-site winery retail stores enjoy a material tax advantage on sales through their channel that is unavailable for wineries without an off-site licence,” Clark’s interim report noted dryly.

It’s a sweet deal for blended wines on the private shelves of the Wine Shop and Wine Rack. But it leaves a bitter taste for smaller VQA wineries that are essentially frozen out of that private retail channel, barred from selling their products in any of the 268 stores operated by their giant competitors in prime locations.

Clark’s panel is discussing the options with representatives of the two big wine chains, but neither Constellation (Wine Rack) nor Peller (Wine Shop) responded to questions, referring all inquiries to their industry lobby group, the Winery & Grower Alliance of Ontario. The group’s president, Patrick Gedge, said they are co-operating fully with the panel.

“These stores have been extremely important to the successful growth of our industry,” Gedge said, because blending with foreign imports yields wines that are “affordable” at under $10 a bottle. The chains have grown to their present size by acquiring the licences of other firms ever since the free trade pact froze the field in place: “Those stores have been bought and sold at market prices over that period of time.”

Gedge argues that the two big firms hold barely 10 per cent of a retail market that is dominated by the LCBO’s monopoly. And while these private chains rely heavily on blended wines, more than 50 per cent of their overall sales emanate from Ontario grapes, he stresses.

When U.S.-based Constellation Brands acquired Vincor Canada in 2006, it became Ontario’s dominant player in private wine retailing. The multinational giant owns properties across the U.S., Argentina, Chile and Italy.

Those vineyards provide “a ready source of unfermented grape juice for blends with Ontario grape juice,” a report from the independent C.D. Howe Institute observed acidly. “Thus, Constellation Brands can sell its foreign-content wines, as does Peller, not just its wines made exclusively from Ontario grapes.”

The current system creates unfair “distortions” for small local wineries “and puts them at a competitive disadvantage relative to a few large Canadian and foreign producers,” the think tank concluded.

Jan Westcott, who heads Spirits Canada but has previously worked for the big brewers and Ontario wineries, muses that the majority of bottles sold by the two big private wine chains are “not really Ontario wine” due to foreign blending. Now, “the hunt for money seems to have freed the government from old thinking,” Westcott says, adding that “legally, these are government stores sitting on government licences.”

Sources say one option is to repurpose some of those wine retail licences to create a new, alternative distribution “channel” that bolsters VQA wines that are 100 per cent Ontario grapes. To avoid possible trade challenges, foreign wines might still be included in some way — though that risks cannibalizing the government’s lucrative LCBO monopoly.

Premier Kathleen Wynne keeps hinting that changes are coming: ‎In a Monday meeting with Australian Trade Minister Andrew Robb, Wynne assured him “we’re going to make some changes” to the way wine is sold in Ontario. “It’s going to be a lot more open.”

With the budget just a few weeks away, Clark’s panel is in the final stages of preparing its recommendations, mindful of the potential political and financial ripples. When it comes to alcohol distribution, the devil is in the details — whether it’s the demon rum or our devilishly blended wine retailing system.

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